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Wednesday, 2 March 2016

FDI in Logistics industry and the major challenges ahead...

A clear cut FDI plan for the logistics sector in India becomes
critical considering that the logistics sector in India is currently in the
growth stage. China and the US where logistics cost as a percentage of cost of
manufacture is much lower, Indian companies still spend nearly 14% of their
cost on logistics. This is substantially higher than the 6-7 % that most
developed countries spend on logistics due the fact that the logistics
infrastructure is much more matured and fine-tuned in these countries. That is
where FDI in the logistics sector along with the strategic, procedural and
technical know how can be a great value addition.

FDI in Logistics sector

Currently, the foreign direct investment (FDI)
in India is allowed thorough 2 routes viz. Automatic Route and
Government Approval Route. Most of the key logistics related services are
covered under the 100% automatic route for FDI. Hence, there is no specific
approval required from the Foreign Investment Promotion Board (FIPB) or the
Cabinet Committee on Economic Affairs (CCEA). Current FDI regulations permit
100% FDI via the automatic route in areas like Transport services, Transport
incidental services, Rental and leasing of transport vehicles, rental of
transport equipment, storage services and warehousing services. While FDI has
not yet been permitted in the transport operator service, there is still
sufficient scope for the FDI to add value in the support services space. Some
of the mega logistics management companies in the world like NYK Line, Hitachi
Transport Systems, Sembcorp Marine, Kerry Logistics, TNT and FEDEX are already
present in India and have already acquired stakes in Indian companies through
the M&A route.

It is interesting to note that nearly 35 out of the top-50
global logistics companies already have a presence in India. Their presence
could either be through the M&A route, subsidiary route, JV route or
liaison route. The tax incentives are also quite attractive. For example for
the cold chain and warehousing facility, there is a 100% deduction on capital
expenditure incurred during the year (other than acquisition of land, goodwill
and financial instruments). The question then is why is FDI not coming into India
in a big way? The answer has partially to do with policies and partly with the
ease of doing business.

Challenges to FDI in Logistics
sector in India...

There are some key challenges to the inflow of FDI into the
logistics sector in India and here are a few that the sector faces to attract
FDI:

India still ranks 133rd in terms of
ease of doing business. China is ranked 89th. This ranking has improved
marginally after the efforts of the present government but there is still a
long way to traverse.

It is not just about ease of doing
business. Even in terms of starting a business, enforcing contracts and winding
up a business, India ranks way behind other emerging market economies like
China, Russia and Brazil.

Although logistics FDI is defined as
under Automatic Route, there are Ministry level clearances that need to be
obtained. Additionally, there are environmental clearances which can be quite a
cumbersome task.

There is also the risk of
rehabilitation and relocation clearances. If your project displaces the local
population or impacts their livelihood, then the businesses need to focus on
how to relocate and offer alternative livelihood to those displaced. More often
than not, such activities acquire political and activist overtones and global
business houses may want to avoid getting embroiled in such matters.

Adjacent infrastructure development is
a key risk for many such projects. For example there may be a projection of
revenues based on traffic and demand which will be based on certain
assumptions. If the adjacent infrastructure, on which you have no control, does
not keep pace, then such projections can go awry negatively impacting the
financial viability of the project.

Time and cost over-run is another risk
that FDI in India faces. In India activities like land acquisition, rising cost
of material, rising cost of equipment can result in time and cost over-runs.
Since many of these activities have regulatory implications, the investor is
not in control of many of these things.

To cut a long story short, the challenges for FDI in the
logistics sector in India are many. But then so is the opportunity. Logistics
is already a $400 billion industry and is likely to be a $1 trillion industry
in the next 5 years. This is the one area that can promise humongous growth for
foreign investors. Secondly, logistics is the missing piece in catapulting
India’s GDP growth from 7.5% to 10%. We have seen in China how infrastructure
and logistics can combine to give a major thrust to growth. India is in a
similar sweet spot. Thirdly, there is a fairly FDI-friendly regime as far as
the logistics sector in India. There are challenges on the ease of doing
business but the current government is moving on a war footing to make India
more competitive and friendly to foreign investors. It is more a question of
when; rather than whether!